But the maker of Camel, Pall Mall and Natural American Spirit brand cigarettes said its earnings excluding those items rose nearly 4 percent as higher prices, productivity gains and selling more of its smokeless tobacco brands that include Grizzly and Kodiak offset cigarette volume declines.

The company remains focused on delivering sustainable growth, "even with a difficult economic and competitive environment," CEO Daniel M. Delen said in a news release.

Reynolds American, based in Winston-Salem, N.C., said its net income fell to $367 million, or 63 cents per share, for the period ended Sept. 30, down from $381 million, or 65 cents per share, a year ago.

Earnings adjusted for the charges related to claims in lawsuits from smokers injured by their cigarette use and other costs were 70 cents per share. Analysts polled by FactSet expected 73 cents per share.

The company has promoted Pall Mall as a longer-lasting and more affordable cigarette as smokers weather the weak economy and high unemployment, and has said half the people who try the brand continue using it. It said premium-priced products continue to face challenging market trends as consumers have less disposable income.

"There is significant kind of down-trading going on in the marketplace in general," Delen said in a conference call with analysts. "Pall Mall is effectively competing for some of those downtraders, but there are significant opportunities for consumers if they want to go down below Pall Mall to be able to do so."

Reynolds American and other tobacco companies are also focusing on cigarette alternatives such as snuff and chewing tobacco for future sales growth as tax hikes, smoking bans, health concerns and social stigma make the cigarette business tougher.

The company sold 7 percent more of its smokeless tobacco brands, chiefly on an increase of 9 percent for Grizzly. Its American Snuff subsidiary's U.S. market share of the segment grew 1.1 percentage points to 31.6 percent.

Reynolds American also tightened its full-year forecast for earnings between $2.63 and $2.68 per share, excluding charges related to legal cases, tax items and other costs.

Analysts expected earnings of $2.65 for the year.

Reynolds American on Tuesday also said its board of directors approved an increase in the quarterly dividend of 3 cents per share, or 5.7 percent, to 56 cents a share. The new dividend will be paid Jan., 3 to shareholders of record on Dec. 9.

Rival Lorillard Inc., the nation's No. 3 cigarette maker, said Monday its net income fell nearly 3 percent in the third quarter as higher costs offset selling more cigarettes at higher prices. It sold about 3 percent more cigarettes on gains of 2.5 percent from Newport and 7 percent from its low-priced Maverick brand.

Altria Group Inc., owner of Marlboro maker Philip Morris USA, is set to report its results Thursday.